2022 (8) TMI 1549 - AT - Income Tax

TDS u/s 195 - reinsurance premium ceded to non-resident reinsurance companies - addition u/s 40(a)(i) - reinsurance premium paid to the NRRI becomes income of the NRRI and held to be accruing and arising in India and therefore chargeable to tax u/s. 5(2)(b) - HELD THAT - Most of the DTAAs define PE to mean fixed place of business, through which business of the enterprises is wholly and partly carried on and includes branch, office, factory, workshop etc. In the case of foreign reinsurers to whom the assessee has remitted reinsurance premium during the subject assessment years do not have any fixed place of PE in India and thus, question of fixed place of PE in India within the meaning of Article 5 of the DTAA does not arise. In fact, the assessee has obtained declaration from foreign reinsurers which are part of paper book filed by the assessee. Thus, in our considered view there is not fixed place of PE of NRRs. AO alleged that there is agency PE of NRRI in India on the basis of availing services of reinsurance brokers. During the subject assessment years, the assessee has remitted reinsurance premium through non-resident brokers outside India. In order to attract agency PE, the Revenue has to establish that person act on behalf of NRRI in India and such person is economically and legally dependent on the NRRI. In the present case, reinsurance brokers act in their independent capacity and they are not dependent agency of the assessee as well as non-resident insurers. They do not conclude any contract for NRRI and thus, we are of the considered view that there cannot be said to constitute business connection for agency PE for foreign reinsurers in India Revenue has also not placed any material on record to demonstrate that reinsurance brokers constitute agency PE for NRRI under DTAA. Therefore, in our considered view, foreign reinsurers do not have PE or business connection in India under relevant DTAA or the I.T. Act, 1961. Therefore, payments are not chargeable to tax in India and are not liable to deduct tax at source u/s. 195 of the Act. Consequently, disallowance u/s. 40(a)(i) of the Act is wholly unwarranted. Even as per understanding of the regulator, reinsurance arrangements with NRR are not chargeable to tax in India. Since, payments made to NRR are not chargeable to tax in India, question of application u/s. 195(2) of the Income Tax Act, 1961, does not arise and this principle is explained in the case of M/s. G.E.India Technology Centre Pvt. Ltd. 2010 (9) TMI 7 - SUPREME COURT where it was held that application to deduct TDS arises only if income of non-resident is chargeable to tax in India. The Hon'ble Supreme Court has held that expression chargeable under the provisions u/s. 195(1) of the Act says that remittance has got to be treated as receipt, whole or part of which is liable to tax in India, if tax is not assessable there is no question of tax at source being deducted. In our considered view, the basis for the Assessing Officer to take support from section 195(2) on the issue of non filing of application to income tax authority to allege that the assessee is liable to deduct TDS on impugned payment is incorrect. Thus reinsurance premium ceded to non-resident reinsurer is not taxable in India under the Income Tax Act, 1961 or under DTAA between India and respective countries where NRRs are tax residents and thus, on impugned payments the assessee is not liable to deduct TDS u/s. 195 of the Income Tax Act, 1961. Consequently, payments made to NRR cannot be disallowed u/s. 40(a)(i) of the Act, 1961. Hence, we direct the AO to delete additions made towards disallowance of reinsurance premium ceded to NRRs u/s 40(a)(i) of the Act. Assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of reinsurance premium under Section 40(a)(i) of the Income Tax Act, 1961.
2. Taxability of reinsurance premium under Section 5 and Section 9 of the Income Tax Act, 1961.
3. Applicability of Double Taxation Avoidance Agreement (DTAA).
4. Obligation to deduct tax at source under Section 195 of the Income Tax Act, 1961.
5. Existence of Permanent Establishment (PE) or business connection in India.

Detailed Analysis:

1. Disallowance of Reinsurance Premium under Section 40(a)(i):
The primary issue was whether the reinsurance premium paid to non-resident reinsurers (NRRIs) without deduction of tax at source was liable for disallowance under Section 40(a)(i). The Assessing Officer (AO) disallowed the premium on the grounds that the income was taxable in India and the assessee failed to deduct TDS. However, the Tribunal concluded that the reinsurance premium ceded to NRRIs is not taxable in India, as the income does not accrue or arise in India. Consequently, the Tribunal held that the disallowance under Section 40(a)(i) was unwarranted.

2. Taxability of Reinsurance Premium under Section 5 and Section 9:
The AO argued that the income of NRRIs accrued or arose in India due to a business connection. The Tribunal, however, found that the income did not accrue or arise in India as the core activities of the reinsurers were conducted outside India. The Tribunal also noted that the reinsurance contracts were independent of the primary insurance contracts and the risk was borne outside India, thus negating the applicability of Section 5 and Section 9 for taxability in India.

3. Applicability of Double Taxation Avoidance Agreement (DTAA):
The Tribunal examined the taxability of reinsurance premiums under relevant DTAAs. It was observed that in cases where DTAAs existed with specific exclusions for reinsurance, the premiums were not taxable in India. The Tribunal emphasized that the provisions of the DTAA, which are more beneficial to the assessee, should prevail over the domestic tax laws. In the absence of a Permanent Establishment (PE) in India, the reinsurance premiums were not taxable under the DTAAs.

4. Obligation to Deduct Tax at Source under Section 195:
The AO contended that the assessee was liable to deduct tax at source under Section 195, as the income was deemed to accrue or arise in India. The Tribunal, however, clarified that the obligation to deduct TDS arises only when the income is chargeable to tax in India. Since the reinsurance premiums were not chargeable to tax, the requirement to deduct TDS under Section 195 did not arise.

5. Existence of Permanent Establishment (PE) or Business Connection in India:
The AO alleged that the use of brokers constituted a business connection or PE in India. The Tribunal rejected this notion, stating that brokers acted as independent facilitators without authority to conclude contracts on behalf of NRRIs. The Tribunal concluded that there was no business connection or PE in India, as the reinsurance activities were conducted independently and outside India.

Conclusion:
The Tribunal held that the reinsurance premiums paid to NRRIs were not taxable in India under the Income Tax Act, 1961, or the relevant DTAAs. Consequently, the assessee was not obligated to deduct TDS under Section 195, and the disallowance under Section 40(a)(i) was not justified. The appeals filed by the Revenue were dismissed, affirming the CIT(A)'s decision to delete the disallowance of reinsurance premiums.